Question

Assume that the following data characterize the hypothetical economy of Trance: money supply = $180 billion; quantity of money demanded for transactions = $140 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate.

a. What is the equilibrium interest rate in Trance?

  

b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded transactions, and the amount of money demanded as an asset in Trance?

Quantity of Money Supplied= ______ Billion

Quantity of Money Demanded = _____ Billion

Amount of Money Demanded Transaction= ____ Billion

Amount of Money Demanded as an asset= ____ billion

Answer 1

money supply = $180 billion

quantity of money demanded for transactions = $140 billion

quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate.

Demand for money = Transaction Demand + Demand for money as an asset

From the above information, we can construct the following table

From the table above, it is clear that at 6% interest rate, money supply = money demand

Hence, the equilibrium interest rate in Trance is 6%.

b. We can answer this question from the above table.

At the equilibrium interest rate of 6%,

Quantity of Money Supplied= 180 Billion

Quantity of Money Demanded = 180 Billion

Amount of Money Demanded Transaction= 140 Billion

Amount of Money Demanded as an asset= 40 billion